US Dollar Index (DXY) pulls back below 97.00 level amid tariff uncertainty
- The Dollar trims previous gains in a risk-averse market with tariff uncertainty growing.
- Trump is expected to sign a sweeping tax bill that might increase doubts about the sustainability of US debt.
- FX trade volumes are subdued on Friday as US markets are closed on Friday.
The US Dollar Index (DXY), which measures the value of the Dollar against the world’s six most traded currencies, is retreating from Thursday’s highs at 97.40, and back to levels below the 97.00 level, as the euphoria from the strong payrolls report turned into caution as the tariffs deadline approaches.
With July 9 around the corner and only three trade deals signed with China, the UK, and Vietnam, Trump announced on Thursday that he will send letters to all trading partners informing them about the tariffs that will be applied to their products.
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The prospects of higher levies to a long list of countries have renewed concerns of higher inflation and lower economic growth, which has been undermining the US Dollar since the April 2 “Liberation Day”.
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Beyond that, Trump’s Tax Bill, which is expected to increase the US debt load by $3.3 trillion in the next ten years, has passed Congress and will be signed by the President, probably today. This legislation is likely to fuel concerns about the sustainability of the US Government debt and act as a headwind for the US Dollar’s recovery.
Currency markets, however, are at half throttle on Friday with the US market closed on the Independence Day bank holiday. This is limiting trading volumes and leading to range-bound trading among most US Dollar crosses. In this context, DXY downside attempts are likely to remain limited.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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